Introduction
The formulation of the export sales contract represents the conclusion of some possibly difficult negotiations and accordingly particular care should be taken regarding the preparation of its terms. It must be borne in mind that an exporter’s primary task is to sell his or her products at a profit and therefore the contract should fulfil this objective insofar as his or her obligations are concerned. Above all, it should be capable of being executed under reasonable circumstances and ultimately produce a modest profit. Full cognisance must be taken of logistics and the supply chain.
Market Environment
Today, conducting business overseas is logistically driven. Hence, the need to conduct adequate research to ensure the logistic entrepreneur company is compatible with the buyer organization and thereby ensure there is an efficient supply chain on which both parties can build on to conduct business.
The following points are relevant:
a Who are the main players in the market and what is their profile?
b Market access and legal/political constraints.
c Market stability and its infrastructure.
d Product availability and its stage of development. It may be the first or second stage of development – low- or high-tech. It is also added value in terms of its develop-ment. Countries like India (see page 33), Pakistan, China and Sri Lanka (see page 141) are moving from a low-tech to a high-tech environment in many industrial and sociably developed regions with a logistics focus and continuous investment in the logistic infrastructure.
e Is the market computer and logistically literate, and are importers/buyers flexible and adaptable?
f Exchange rate stability and importation cost such as import duty (see page 117), sea/airport charges, and sales tax.
g Membership of economic or trading bloc. Excellent example found in EU – 27 Member States – good infrastructure – single market permitting distribution of goods without border controls embracing customs duty and above all, high-tech and logistically focused (see page 133). North America is likewise logistically focused (see page 136).
h Whether market is fully developed, underdeveloped, or developing. Fully developed
Chapter 3
are high-tech, capital-intensive with fully trained workforce. Conversely the less developed countries (LDCs) are agriculturally driven and often a commodity-focused economy with low labour costs and low levels of technology. Moreover, they rely on non-convertible currencies.
i Opportunity for inwards investment embracing joint venture, licensing, franchise, mergers and acquisition or industrial transplant.
j Perceived benefits of the market such as indigenous resources, strategic geographical location etc.
Market Entry Strategy
Companies must have a logistic strategic focus in their decision-making process of select-ing and enterselect-ing a market, a series of markets, or cluster markets. The followselect-ing logistic strategic considerations are relevant:
a To have a customer portfolio with an international base.
b To increase production thereby lowering unit cost and permitting more competitive pricing.
c To raise the company profile to attract more capital into the company and provide more funds for new technology.
d To realise a more volume-based and productive utilisation of the company infra-structure and its logistics/supply chain.
e To increase market share and dominance.
f To increase general competitiveness of the company.
g To ensure the long-term future of the company.
h To develop a proactive, rather than a reactive, company, which is globally logistically focused and market research-driven, with a continuous focus on client base and marketplace environment.
i To develop an international brand image.
Many companies tend to develop/target a cluster market concept, each of which is logistically focused and thereby reliant on a distribution centre in one country served by reliable supply chains in neighbouring countries. It also favours a volume market with the opportunity for more productivity and logistic development.
Basically, the role of logistics is the development of systems and supporting coordin-ation processes to ensure the customers’ aspircoordin-ations are met. Planning is an essential factor with well-thought-out and designed logistic systems. Overall, it embraces three basic areas.
The first is to identify customer service needs. The key components and the prefer-ences must be identified. Reliability, cost of service, value added, and performance are key areas. Cluster customer markets of similar service preferences are ideal.
The second is to define customer service objectives. It is a market-driven logistics strategy. This embraces a zero failure rate. This is more difficult to realise with a global supply chain involving the complexity of international regulations compared with a national supply chain operating exclusively in one country such as the USA, Germany, or China. The global supply chain is likely to involve 3PLs and 4PLs, customs duty, di ffer-ing transport modes, a variety of international trade regulations crossffer-ing international boundaries, Incoterms 2000 (see page 46), UCP 600 (see page 52) packaging regula-tions, products specification, various cultures, differing currencies, etc. It is a challenging Export Sales Contract 33
operation that the global logistics entrepreneur must overcome. A development in the twenty-first century is tracking, whereby mega-container operators are able, through satellite communications INMARSAT (see page 145), to locate for the customer the whereabouts of the consignment in its international transit and anticipated arrival time at the destination. Software is a key factor in the design of the global logistic system and enables, through e-commerce, continuous communication such as RFID (see page 108).
The cost benefit of the customer service will be explored in greater depth in chapter 3, but a number of salient points are very significant, which we will briefly examine. The first stage is to identify the profitability emerging from individual customers. High-volume customers generate substantial profits, but lower unit cost. The second aspect is to continuously examine ways of reducing cost in the supply chain compatible with providing an acceptable service to the client. This is an important area in global logistics as international transport operators are continuously remodelling their services to become more competitive in transit time. The ‘hub and spoke’ system in a container operation is an example. Finally, the credit rating of the customer must be sought, engaging Standard & Poors of Stockhom (see page 126), and the country risk as available from Dun & Bradstreet, which monitors country risk (see page 56).
Constituents of the Export Sales Contract
The formulation and execution of the export sales contract involves four elements – insurance of the goods, payment of the goods, the contract of carriage and the export sales contract. All are interrelated and are primarily based on the global logistic oper-ation and the related documentoper-ation. This embraces the cargo insurance certificate, the contract of carriage found in a bill of lading, air waybill or consignment, the payment arrangements involving presentation of the bill of lading to the bank to confirm ship-ment of the goods, and the export sales contract identifying the foregoing arrangeship-ments on a timescale basis. There are numerous variations to the foregoing arrangements (see page 79), which provide the logistics operator the ability to reduce cost, improve produc-tivity and above all improve service and competiveness to the customer. The key to it is to fully understand the international trade environment embraced in the supply chain and have complete transparency with all the contributors/participants in the supply chain.
This embraces credit rating, risk area, customs, routing, payment arrangements, pack-aging, transport cost, Incoterms, warehouse management, distribution centres, currency, 3PLs, 4PLs, software, insurance and product specification. A system of checkpoints to develop a cost benefit strategy to the supplier/consumer is an effective way of developing an efficient supply chain.
Details of an export contract are given below:
a Exporter’s (seller’s) registered name and address.
b Importer’s (buyer’s) registered name and address.
c Short title of each party quoted in a and b.
d Purpose of contract – the specified merchandise sold by person in item a to addressee quoted in item b.
e Number and quantity of goods, precisely and fully described. In particular the contract must mention details of any batches and reconcile goods descriptions with custom tariff description (see page 74).
f The price. The currency selected must be stable and convertible (see page 52). It may be in the seller’s or buyer’s currency or third currency acceptable to both parties. The 34 Export Sales Contract
seller’s currency transfers the risk of variation to the buyer; conversely the buyer’s currency risk rests with the seller, while the third currency shares the currency risk variation between seller and buyer.
g Terms of delivery. It is important that the correct Incoterm 2000 (see page 50) is used and the supply chain management keeps it under continuous review.
h Terms of payment, for example open account, cash with order, letter of credit, open account or documents, against payment or acceptance. Again, salient factor in the design of the supply chain.
i Delivery date and shipment date or period. This is a critical area with item j and has a strong interface with international transport operation (see page 79).
j Methods of shipment – container, Ro/Ro, air freight or multi-modal road/container/
rail/air.
k Method of packing. Both parties must be fully aware and agree on packing speci fica-tion. Skilful packing can improve the load-ability of the cargo unit/container/hand-ling. Stringent regulations apply to dangerous classified cargo shipments (see page 86).
l Cargo insurance policy/terms. The option exists for the seller/buyer to undertake the insurance and depends on the Incoterm 2000 (see page 50).
m Import or export licence details or other instructions. The period of their validity must be reconciled with the terms of payment and delivery date or shipment date or period. There is a zero tolerance with the import/export licence extension, which the logistic operator must acknowledge.
n Shipping, freight and documentary requirements and/or instructions. This includes marking of cargo. A complex area that the logistic operator must be familiar with.
This includes pre-shipment documentation (see page 83).
o Contract conditions, for example sale, delivery, performance (quality) of goods, arbitration, security, etc. This embraces local conditions that will vary with overseas destinations, especially customs clearance (see page 78).
p Signature. Both parties must ensure that a responsible person at director or manager-ial level signs the contract and the data should be recorded.
Obviously the terms of the export sales contract will vary by circumstance and must be driven by logistics strategy. It may feature agency involvement, after-sales activities such as the availability and supply of spares, product servicing, training, advertising and promotion cost, and so on. It may embrace outsourcing of components and third-country assembly, embracing inbound and outbound movement. The logistics operator must minimise any risk areas such as political situation, currency fluctuations, unreliable transit schedules, protracted customs clearance, excessive documentation to effect cus-toms clearance, liquidation of the buyer, and absence of adequate software in the supply chain management. Usually, the documents (item h) will be electronically transmitted, feature a performance bond, and the contract is subject to English law, or the national sovereignty of the buyer’s/seller’s country and an arbitration clause. Each party of the contract must retain a copy.
A sound logistic management strategy is required and full use must be made of com-puterisation. The tactics adopted include the strategy required for continuous review in the light of changing marketing conditions. Five areas need special attention: cash flow, administration, insurance, risk areas and total cost.
The foregoing embraces: (a) cash flow and the payment cycle and the options available to speed up payment through factoring (see page 51); (b) administration/supply chain Export Sales Contract 35
management to be professional/focused and strive to improve efficiency; (c) credit insurance can be arranged to lessen payment risk; (d) risk areas such as credit rating evaluation/product liability/currency/political situation; and (e) total cost. The logistics operator designing the supply chain must fully understand the role of the Incoterms and the financial payment and the interface with the international transport operation.
Business-to-Business (B2B) and Business-to-Consumer (B2C)
The process of conducting business globally is electronically driven and there is no doubt it is a main driver in the globalisation of logistics. The web/Internet not only provides a good promotional tool available to procurement companies looking for suppliers, but also for conducting digital trading. Digital trading extends to the digital trade transport network embracing the logistics chain. This includes importers, exporters, freight for-warders and 3PL providers, terminals, carriers, government departments, banks and financial institutions, insurance companies and inspection agencies – online and paper-less trading in as short a time as possible. Hence, from the procurement standpoint it ranges from the issue of purchase orders, insurance and letters of credit to inspections, the insurance of government certificates, trade declarations and payment functions.
Scanning the web to obtain potential overseas buyers and analysing potential com-panies and markets is a key area in the exporter’s strategy today. It enables both the MNIs and the small and medium enterprises (SMEs) to operate in the same environment with similar market penetration strategies crossing international barriers and developing the B2B or B2C contact.
Hence, the exporter with a logistic focus in developing market entry strategies must have a high-tech computer resource and software to develop a viable overseas market.
Procurement companies are unlikely to do business with suppliers that are not computer logistic-focused/oriented. A market research strategy must be adopted.
During the past decade and much facilitated by e-commerce internationally, we have seen an enormous increase in the B2B and B2C sectors. It is, to the exporter, a very efficient way to develop the international portfolio and in particular eliminates the inter-mediary with significant cost savings, and accelerates the decision-making process.
Moreover, it develops empathy between the two parties and favours strongly a logistic and computer-focused approach. It favours both the MNIs and SMEs.
The B2B e-commerce market is well established and favoured strongly by personnel designing the logistic supply chain as it eliminates the intermediary and encourages transparency. Moreover, it enables the international sales logistics team to concentrate on selling and efficient supply chains development. It is low cost and emerges when the exporter/importer have a good relationship and complete synergy.
The B2C is distinguished from the B2B by the nature of the customer and how the customer uses the product. In business marketing international customers are organisa-tions such as businesses, government bodies and instituorganisa-tions such as hospitals. The B2C market is often through e-commerce such as cars and accessories, home appliances and accessories, books, financial services, tourism, transport and food products. It is very popular in the EU market.
An area of significance with B2B and B2C is to maintain and develop a good website, which is completely logistically focused and have well-trained and professional personnel handling enquiries with a good logistic knowledge. It should be manned 24 hours per day to handle global enquiries in various time windows. The website must be targeted to focus on individual logistic markets and ideally in the language of the buyer. It is often 36 Export Sales Contract
prudent to feature in distant markets a local contact such as an agent/distributor/fran-chisee who can demonstrate the product to the importer.
It is important to bear in mind that consumer and business markets differ in the nature of the markets, market demand, importer behaviour, exporter/importer relationships, buying power, and market environmental influences such as legal, cultural, political, logistic, exchange control and economic. Also check the country/company credit rating.
Evolution and Revolution of Logistics and Supply Chain Management
As indicated in the earlier chapter it is appropriate briefly to record the growth of logistics and supply chain management. In the 1960s and 1970s the freight forwarding industry witnessed/contributed a rapid growth in door-to-door services. This was driven very much by containerisation, which has changed considerably during this 40-year period. However, logistics has changed at a faster rate as the customer demands more efficiency and value-added benefit in the marketplace. The biggest changes in the logistics industry have occurred in the last 10 years. This is largely due to increased globalisation making the supply chain longer and more complex, rapid developments in IT – particu-larly the Internet – and the industry consolidation (mergers and acquisitions (M&A)).
Figure 3.1 shows that in the 1960s there was little or no integration between the various function areas within exporting companies with respect to the movement of goods. Integration between departments increased steadily in the following years, until in the 1970s the two distinct functions of materials management and physical distribution became prominent. These gradually merged into a more integrated logistics function by the early to mid-1980s. The high level of fragmentation in the 1960s produced oper-ational inefficiencies and high cost. In the early 1970s logistics costs accounted for 15 per cent of gross domestic product (GDP) in the US, 14 per cent in Australia and 25 per cent in Japan.
Figure 3.1 Logistics evolution to supply chain management.
Source: Alfred J. Battaglia, Reckitt & Colman.
Export Sales Contract 37
In the 1960s and 1970s shippers examined distribution cost holistically under the ‘total cost concept’. This led to increased integration between different functional areas, which today fall under the single logistics umbrella. Undoubtedly, containerisation was the driving force that simplified inland moves to groupage services and depots, reduced inventories for shippers and eliminated intermediate warehouses. Moreover, the rapid and regulated flow of traffic in the container network, both inland and overseas, permit-ted a reduced safety stock level. This arose also because more regulapermit-ted delivery, more rapid response of the system, and total stock, in the pipeline capital assets in transit (see page 18), is reduced by a quicker transit time.
Today, several of the top 10 3PLs are Swiss companies founded in the nineteenth century. Examples include Hausmann – a subsidiary of Panalpina – and CSCL. Air freight was a fast-growing industry in the 1970s. Emery was a leading player, but today focuses attention onto other transport modes. In the container business various sub-sidiaries and acquisitions over the years were consolidated at Maersk Logistics and APL Logistics in 2000 and 2001, respectively. In 2005, Maersk Logistics merged with the P&O Ned Lloyd Logistics when the two liner companies merged. Today, Maersk Line is a leading player in global logistics.
In the 1990s, just in time (JIT) became known and at the same time distribution services began to include the management of customer inventories and management of cargo flows from suppliers and sub-suppliers. Moreover, globalisation and the use of Internet technology paved the way for global sourcing, which triggered global supply chain management solutions.
Johan Wanninga – Managing Director of Maersk Logistics for the UK and Ireland – has indicated that the evolution of logistics and supply chain management in the last seven years has been faster than at any time in the industry history. Basically, because of labour costs, European and North American retailers had increasingly replaced suppliers in Southern China with those in Northern China and Vietnam (the latter facilitated by WTO access). The 3PL has expanded the number of consolidation centres across China.
Supply chain integration has increased significantly. IT developments have facilitated the
Supply chain integration has increased significantly. IT developments have facilitated the